HIPC and Trade Policy Reform: Some Early Observations

The HIPC Initiative requires countries receiving debt relief to undertake a Poverty Reduction Strategy programme involving elements of trade policy reform. This study reviews country experiences with respect to the impact of reforms of trade and trade-related policies on economic performance, export capacity and the ability to attract foreign direct investment. Trade policy reform can be crucial for success in international markets. Opening domestic markets will change relative prices, induce adjustments in consumption and production patterns to reflect comparative advantage and, hence, lead to a more efficient use of resources. The resulting efficiency gains will tend to translate into higher levels of economic growth, which in turn make investments from domestic and foreign sources more attractive and increase the country’s production and export capacity. Many HIPC are not able to realise their full export potential due to supply-side constraints. Indeed, high levels of debt are often the result of the inefficient use of investment resources in the past, e.g. for the development of infrastructure. In this context, trade policy reform, covering border and behind-the-border measures, can complement efforts to overcome structural weaknesses and anti-competitive domestic policy practices and introduce more market- driven institutions and decision-making into often highly distorted domestic economies. While at present the empirical results on the economic performance of different groups of HIPC are only preliminary and indicative, the available evidence suggests that the set of policy reform requirements expected from countries participating in the Initiative is positively linked to income, investment, and integration into the world market. Countries that have reached economic stability and started to implement policy reforms in the context of their Poverty Reduction Strategies have performed better overall during 1997-2001 than countries that are less advanced in their policy reform programmes, which, however, still did better than countries that had not yet attained economic stability and started with domestic reforms. These findings need, however, to be verified through careful econometric analysis, once a sufficiently comprehensive time-series of relevant economic data becomes available. Such analysis might also shed light on the causality of success. In particular, it might make it possible to establish whether participating countries have performed well because of the HIPC requirements associated with debt relief, or whether good policies and relatively good economic performance in the past have made it easier for them to qualify for debt-relief.